still not a level playing field; regulatory differences ...methodological differences are also...

December 9, 2010

Europe: Banks

Still not a level playing field; regulatory differences drive relative returns

A wide gap in average risk weights …

European investment banks (IBs) report similar

risk-based leverage (CT1) to those in the US, but

substantially higher “simple” leverage (TATE).

This is a function of differences in average risk

weights, which in 3Q2010 stood at 27% for

European IBs versus 54% in the US, on our

estimates. This disparity can be explained by

multiple factors, with genuine business mix

differentiation being important. Pure

methodological differences are also meaningful,

in particular for market RWA.

… set to continue under Basel III

Under Basel III, the gap in average risk weights

does not close, on our estimates, allowing the

leverage disparity to continue. Swiss IBs are an

exception, as (substantially) higher minimum

capital ratios (as per new Swiss regulation)

compensate for lower risk weights, thus closing

their TATE gap with US peers.

In our view, global comparability of risk-based

leverage cannot be achieved without ensuring a

consistent and transparent approach to RWAs.

European IBs’ competitive position improves

The end game of the current regulatory set-up is

an improved competitive position for non-Swiss

European IBs (e.g. Deutsche Bank, BNP Paribas),

in our view. Comparatively higher leverage should

allow for a pricing advantage and consequently an

increase in their global market share.

For Credit Suisse/UBS, we expect steady-state

returns to de-rate, as Swiss regulation drives a

sharp increase in capital per unit of assets; CoCos

can be a partial mitigant. All in, we struggle to see

Swiss banks exceeding mid-teen ROTE under the

new regulatory regime (exceeded 30% pre-crisis).

We find that the historically high return differential

between Swiss IBs and Deutsche Bank closes

when targeted capital structure is applied.

CS down to Neutral; BNP remains CL Buy

We downgrade Credit Suisse from Buy to Neutral

following a revision of our valuation model and

steady-state returns under the new regulatory

proposal; our preferred European bank with

exposure to capital markets is BNP Paribas, which

is on our Conviction Buy List.

ACTION RATING AND 12-MONTH PRICE TARGET CHANGES

COVERAGE VIEW: NEUTRAL

RELATED RESEARCH:

October 18, 2010: Capital is back in the spotlight, but one

size does not fit all

October 12, 2010: Swiss endorse CoCos – laying out

scenarios for European TBTF capital surcharge

September 21, 2010: Capital post Basel III: 7% Core Tier 1

not the magic number; select banks in capital surplus

Jernej Omahen +44(20)7774-6324 [email protected] Goldman Sachs International

The Goldman Sachs Group, Inc. does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. For Reg AC certification, see the end of the text. Other important disclosures follow the Reg AC certification, or go to www.gs.com/research/hedge.html. Analysts employed by non-US affiliates are not registered/qualified as research analysts with FINRA in the U.S.

Richard Ramsden (212) 357-9981 [email protected] Goldman Sachs & Co. Pawel Dziedzic +44(20)7774-1279 [email protected] Goldman Sachs International

Aaron Ibbotson, CFA +44(20)7774-6661 [email protected] Goldman Sachs International

The Goldman Sachs Group, Inc. Global Investment Research

Share Price Target RatingPrice Old New Old New

Credit Suisse SFr 38.2 57.0 49.0 Buy Neutral

UBS SFr 15.5 20.9 20.1 Neutral Neutral

Deutsche bank € 38.2 49.0 51.0 Neutral Neutral

Barclays £p 263.0 339.0 339.0 Neutral Neutral

BNP € 49.3 78.0 78.0 Buy* Buy*

Societe Generale € 38.9 58.0 58.0 Buy Buy

* denotes Conviction List membership

December 9, 2010 Europe: Banks

Goldman Sachs Global Investment Research 2

Table of Contents

Overview: Still unlevel playing field under B3; regulatory arbitrage drives relative returns 3

RWA increase under Basel III substantial, mitigation is not execution risk free 5

A wide gap in European and US risk weights continues under Basel III 7

Swiss banks’ returns to de-rate, in absolute and relative terms, in our view 17

Estimates changes and valuation 21

Credit Suisse (CSGN.VX): Absolute upside attractive, relative in line; down to Neutral 22

Appendix I: Peer group, methodology and trying to bridge the gap in US GAAP and IFRS 24

Appendix II: Swiss bank returns to de-rate, in absolute and relative terms, in our view 25

Prices in the body of this report are based on the close of December 7, 2010.

We would like to thank Eugene Zagorovskis for his contribution to this report.



Overview: Still unlevel playing field under B3; regulatory arbitrage drives relative returns

We lay out the global peer group and accounting approach/adjustments we use as a basis for comparisons in Appendix I.

RWA increases under Basel III substantial, mitigation is not execution risk free

IBs have communicated sharp increases in RWA due to the Basel III effects; we believe company guidance is reasonably precise,

providing gross increases in RWA as well as mitigation targets. Cumulatively, mitigation targets are large; in total, the four

European IBs are looking to reduce RWA by €238 bn or 33% of communicated gross increase. For most banks, planned disposals

account for a meaningful proportion of mitigation and are therefore subject to execution risk, in our view. Successful execution adds

c.100 bp to CT1 ratios.

More broadly, we believe the new treatment of select assets will result in banks no longer being willing to hold them – the

regulatory changes, therefore, are likely to push these assets into the non-bank sector – one such asset class could be low-rated

securitizations, which all banks have earmarked as part of their mitigation programmes.

A wide gap in European and US risk weights to remain under Basel III

The old debate of different leverage levels between European and US IBs has recently been revived, as part of changes relating to

Basel III. In essence, this debate boils down to European IBs reporting similar CT1 ratios (i.e. risk-based leverage) to those in the US,

but substantially higher non-risk based leverage. In our view, this is primarily a function of average risk-weight differentials, which

in 3Q2010 stood at 27% for IBs in Europe and 54% for those in the US. Under Basel III, we estimate new risk weights to increase

towards 39% for European IBs and 71% for the US. We therefore do not expect the application of Basel III to meaningfully close the

gap – we estimate the gap will narrow marginally, from 99% to 79%.

We see the following main reasons for the discrepancy in risk weightings: genuine business mix differences, differences in total

asset reporting under US GAAP and IFRS, which we adjust for; differentials in off-balance sheet asset amounts and varied

approaches to RWA calculation. Due to limited disclosure, we are unable to quantify the contribution of each of these factors.

We show in Exhibit 10 how a mechanical application of various US IB risk weights to European IB assets would impact CT1 ratios,

but caution that this is only a theoretical exercise, based on several significant assumptions. We do not change our estimates for

European banks risk weights (and RWA) on the back of this analysis. However, we believe that with risk weightings failing to

adequately capture actual levels of risk during the recent crisis, market focus and debate on this topic are likely to increase.

We believe it is imperative that the global standardization of capital adequacy does not end at setting broadly similar methodology

for the calculation of CT1 capital, but also ensures consistent calculation of the denominator, i.e. RWA.



Swiss bank returns to de-rate, in absolute and relative terms, in our view

We expect the Swiss banks to face severe pressure on their returns as the amount of capital per unit of assets rises sharply, in line

with the spirit of new regulation. We believe CoCos are crucial in Swiss banks’ attempts to mitigate some of the return compression.

This said, even if we assume full CoCo issuance (for both the mandatory buffer as well as the SIFI surcharge) returns would decline

by 7%-14% (so ROTE in the c.16%-17% range) compared to “normalized” 2012E levels, all else equal. The magnitude of a de-rating

increases to 16%-24% (so ROTE in the 14-15% range) if we assume the 3% mandatory buffer is met through tangible equity build-up.

In either case, we struggle to see Swiss banks exceeding a mid-teen ROTE under the new regulatory regime. Historically, the ROTE

of Swiss IBs exceeded 30%, in good years.

In contrast to the Swiss banks, Deutsche Bank has a similar starting point of leverage, but without the same de-leveraging pressures,

in our view. As a consequence, we see a compression in the historically high ROTE differential between the Swiss banks on one side

and DBK on the other – the Swiss banks’ ROTE was 1.9x higher than that of DBK in the 2004-06 period, while we expect it to decline

towards 1.4x in 2012. Assuming full implementation of the new Swiss capital regime, this differential could fall further, towards

1.1x-1.2x.



RWA increase under Basel III substantial, mitigation is not execution risk free

We lay out the global peer group and accounting adjustments for the approach we use as a basis for comparisons in Appendix I.

IBs have communicated sharp increases in RWA due to the Basel III effects; we believe company guidance is reasonably

precise, providing gross increases in RWA as well as mitigation targets. Cumulatively, mitigation targets are large; in total,

the four European IBs are looking to reduce RWA by €238 bn or 33% of communicated gross increase. For most banks,

planned disposals account for a meaningful proportion of mitigation and are therefore subject to execution risk, in our view.

Successful execution adds c100 bp to the CT1 ratios.

More broadly, the new treatment of select assets will result in banks no longer being willing to hold them – the regulatory

changes, therefore, are likely to push these assets into the non-bank sector – one such asset class could be low rated

securitizations, which all banks have earmarked as part of their mitigation programmes.

Exhibit 1 summarises the Basel III impact on European and US IB RWA.

Exhibit 1: RWA in Europe driven 64% higher by regulatory change; mitigation plans of €238 bn RWA equivalent are large and ambitious, in our view

Risk weighted assets, bn

Note: For C, net increase as per company guidance, gross increase as per GS estimate. For UBS, management action guidance is for “up to SFr100 bn”, we incorporate SFr60 bn.

Source: Company data, Goldman Sachs Research estimates.

On aggregate, we expect European IBs to show a gross increase in RWA of €726 bn (64% increase), of which the new treatment of

securitizations amounts to €231 bn. Cumulative mitigation plans amount to €238 bn, resulting in a net increase of €489 bn. We

therefore expect Basel changes to lift the aggregate RWA by 43% from current levels. These are big numbers and as such we believe

the aggressive timing of mitigation strategies could well end up easing, and more closely reflecting the maturity profile of assets

held.

Stock specific, the range of our expectations of gross RWA increases is wide, with UBS (+92%) the highest and Barclays (BARC)

(+37%) the lowest. The banks than get to a lower net increase through mitigation – European IBs are targeting a roughly similar

magnitude of mitigation actions (around 30%), except for UBS, which is targeting mitigation at 50%. We believe UBS’s target is

ambitious; our estimates allow for SFr60 bn of mitigation effects, compared to UBS’s SFr100 bn target.

CS UBS DBK (incl DPB) BARC Total European IB BAC C JPM MS Total US IB

ccy chg % ccy chg % ccy chg % ccy chg % € chg % RWA chg % RWA chg % RWA chg % RWA chg % US$ chg %

3Q10 228 - 208 - 345 - 405 - 1,141 - 1,477 - 1,003 - 1,169 - 325 - 3,975 -

(+) Gross increase 175 77% 192 92% 278 81% 150 37% 726 64% 600 41% 779 78% 400 34% 240 74% 2,019 51%

Gross RWA, B3 403 - 400 - 623 - 555 - 1,867 - 2,077 - 1,782 - 1,569 - 565 - 5,993 -

(-) Management action -60 -26% -60 -29% -90 -26% -50 -12% -238 -21% -230 -16% -322 -32% -180 -15% -100 -31% -832 -21%

% of gross increase -34% - -31% - -32% - -33% - -33% - -38% - -41% - -45% - -42% - -41% -

(=) Net increase 115 51% 132 63% 188 55% 100 25% 489 43% 370 25% 456 45% 220 19% 140 43% 1,186 30%

Net RWA, B3 (proforma) 343 - 340 - 533 - 505 - 1,630 - 1,847 - 1,460 - 1,389 - 465 - 5,161 -



In the US, our range of gross RWA increases for the aggregate of IBs is even larger, at 34%-78% (or US$2 tn in aggregate) but the

average of 51% is below that in Europe (64%). We estimate mitigation actions in the 38%-45% range (over US$800 bn in aggregate),

resulting in net increases of around 30% (Europe 43%).

We also find that new treatment of securitizations account for a third of aggregate RWA increases; for BARC, the securitization

impact alone is half of the total. We believe that true sales of these assets come with a high execution risk – that said, we find that a

reduction in line with the maturity profile (we estimate at 5-10 years) of the assets is execution risk free.

Exhibit 2: Securitizations account for a large proportion of RWA inflation; disposals are not execution risk free

Securitization exposures, bn


Securitisations rated <BB-Notional

(deduction)BIII RWA

(12.5x notional)% of gross BIII RWA increase

CS 0.7 9 5%UBS 3.0 38 20%DBK 8.9 111 40%BARC 5.8 73 49%Total (€) 18 231 32%Balances shown as at 2Q10 for CS and BARC and 3Q10 for UBS and DBK



A wide gap in European and US risk weights continues under Basel III

The old debate of different leverage levels between European and US IBs has recently been revived, as part of changes

relating to Basel III. In essence, this debate boils down to European IBs reporting similar CT1 ratios (i.e. risk-based leverage)

to those in the US, but substantially higher non-risk based leverage. This is a function of average risk weight differentials,

which in 3Q2010 stood at 27% for IBs in Europe and 54% for those in the US.

Under Basel III, we estimate the new risk weights to increase towards 39% for European IBs and 71% for the US. A

somewhat narrower, but still a substantial 79% gap in average risk weights remains, on our estimates, allowing for a

disparity between risk based and non-risk based leverage to continue. This said, Swiss regulation is driving for higher CT1

ratios, which we believe will close the leverage gap to the US banks. For the time being, however, we have not observed

similar moves by the local regulators of other European IBs.

We see the following main reasons for the discrepancy in risk weightings: genuine business mix differences, differences in total

asset reporting under US GAAP and IFRS, which we attempt to adjust for (all of our Exhibits use adjusted IFRS total assets);

differentials in off-balance sheet asset amounts and varied approaches to RWA calculation. Due to limited disclosure, we are unable

to quantify the contribution of each of these factors.

We also show how a mechanical application of various US IBs risk weights to European IBs assets would impact CT1 ratios, but

caution that this is only a theoretical exercise, based on several significant assumptions (Exhibit 10). We do not change our

estimates for European banks’ risk weights (and RWA) on the back of this analysis. However, we believe that with risk weightings

failing to adequately capture actual levels of risk during the recent crisis, market focus and debate on this topic are likely to increase.

We believe it is important that the global standardization of capital adequacy does not end at setting a uniform methodology for the

calculation of CT1 capital, but also ensures consistent calculation of the denominator, i.e. RWA.

Theoretical and historical backdrop – risk weights failed during the last crisis

As the recent crisis has shown, in our view, assigning the appropriate risk weights (rw) is all important. A lower risk weight should

mark a lower probability of default (pd) as well as a loss given default (lgd); the two then form a basis for any RWA calculation. We

believe it became obvious during the crisis that RWAs failed to gauge actual riskiness of bank assets – banks with an overall low risk

weight frequently suffered losses that were disproportionally higher, compared to those that had higher risk weights.

In Europe, we believe the best examples of “low risk” banks that required urgent assistance include: HRE (and within it, Depfa),

Dexia, RBS, UBS and Commerzbank. This took place as some of the lowest risk weighted assets (i.e. widely perceived to be the

“safest”) incurred some of the largest losses; 0% rw structured products are an obvious example.

Exhibit 4 shows the theoretical relationship between risk-based and non-risk based leverage, as a function of risk weights (CT1 =

TE/TA * 1/rw). In simple terms, it demonstrates that a low risk weight, when misjudged, can give rise to substantial capital

misallocation.



Exhibit 3: Some of the lowest rw banks produced some of the largest lossesPBT (2008-09) as % of total CT1 (2007) versus RWAs as % of total assets (2007) for

major European banks

Exhibit 4: Theoretical relationship between CT1 and rw, when TETA static Theoretical example, assuming the same asset is assigned a range of risk weights,

with TA of €100, TE of €10 and hence static leverage ratio of 10x



Europe versus US: Similar risk-based leverage (CT1 ratio) but twice the (simple) leverage

When compared to US peers, European IBs report substantially higher leverage ratios (TATE). In contrast, the CT1 ratios are similar.

In our view, this is primarily due to the substantial difference in average risk weights (Exhibit 5).

One of the frequent explanations is that this difference is primarily driven by US IBs reporting RWAs under Basel 1, while European

IBs do so under Basel 2. Both are likely to move to Basel III – and current company guidance on Basel III RWA suggests that the

differential in rw will remain broadly unchanged.

We calculate the average rw for European IBs will increase from 27% under Basel 2 to 39% under Basel III; and in the US from 54%

currently to 71%. This would lead to the difference in rw decreasing marginally, from 99% to 79%.

As is always the case, an average hides disparity within the group. In the case of European IBs, the key capitalization metrics of

TATE, rw and CT1 are particularly diverse, which an observation of the aggregate diminishes. We therefore also make the following

points:

‐100%

‐80%

‐60%

‐40%

‐20%

0%

20%

40%

60%

80%

100%

0% 10% 20% 30% 40% 50% 60% 70% 80%

PBT (200

8‐09

) as %

total assets ex derivatives (200

7)

RWA as % of total assets ex derivatives (2007)

DEXI.BR

BNPP.PA

SOGN.PACAGR.PA

CNAT.PACBKG.DE

DBKGn.DE

ISP.MICRDI.MI

BBVA.MCSAN.MC

CSGN.VX

UBSN.VX

BARC.L

HSBA.L

LLOY.L

RBS.L

STAN.L

High Risk WeightsHigh Profitability

Low Risk WeightsHigh Profitability

High Risk WeightsLow Profitability

Low Risk WeightsLow Profitability 0%

10%

20%

30%

40%

50%

60%

80% 70% 60% 50% 40% 30% 20%

Co

re T

ier

1 (

%)

Risk Weighting



On the issue of non-risk based leverage ratio (TATE), the disparity among European IBs is high. CS and DBK report TATE

in the 39-43x range, while UBS and BARC report TATE significantly lower, at 25-26x. The low end of the range is broadly

comparable with the highest TATE in the US, that of Morgan Stanley at 23x.

On the issue of average risk weight, the disparity among the European IBs is limited to the difference between BARC on

one side (with 37%) and all of the others, which report a rw in a tight range of 21%-25%.

Finally, on the issue of CT1 ratio, the European IBs report an average of 10.2%, yet UBS has by far the highest CT1 with

14.2%.

Exhibit 5: Europe vs. US, before and after Basel III: wide disparity in leverage but similar CT1 ratio, due to a wide spread in rw

Simple and risk-adjusted leverage ratio, risk weightings (3Q2010)

Note 1: Total assets for US banks and CS as per company accounts under US GAAP. For DBK, UBS and BARC US GAAP proxy assets calculated as

IFRS total assets less derivative balances. Note 2: CT1 for European banks is calculated as Tier 1 capital less hybrids. We treat CS’s “Claudius”

instrument as hybrid, while CS has regulatory approval to include it in its CT1 capital. For US banks CT1 calculated as Tier 1 common ratio. Note 3:

BARC figures are as of 1H2010, due to semi-annual reporting.


Basel I / II Basel III Change in risk weighting (net)Leverage(TA / TE) Core Tier 1 RWA / Assets RWA / Assets

(net)RWA / Assets

(gross) ppt %

CS 43x 10.3% 21% 32% 38% 11ppt 51%

UBS 25x 14.2% 22% 36% 42% 14ppt 63%

DBK (incl DPB) 39x 8.5% 25% 39% 45% 14ppt 55%

BARC 26x 10.0% 37% 47% 51% 10ppt 28%

Average Europe 32x 10.2% 27% 39% 45% 12ppt 44%

BAC 17x 8.4% 63% 79% 89% 16ppt 25%

C 15x 10.3% 51% 74% 90% 23ppt 45%

JPM 18x 9.5% 55% 65% 73% 10ppt 19%

MS 23x 10.7% 39% 55% 67% 17ppt 43%

Average US 17x 9.4% 54% 71% 82% 16ppt 30%

US / Europe -45% -8% 99% 79% 81% 34% -33%

US - Europe -14x -0.8ppt 27ppt 31ppt 37ppt 4ppt -14ppt



Exhibit 6: Higher leverage translates into similar CT1, through lower risk weights; UBS an exception with its 14.2% CT1

Reported TATE and CT1 ratio and current risk weighting (3Q2010)


US v Europe: similar CT1, different leverage

0%

4%

8%

12%

16%

20%

0x 10x 20x 30x 40x 50x

Core Tier 1

TATE

CS

UBS

DBK

BARC

BAC

CJPM

MS

15x - 43x range

±1

.1%

ra

ng

e

Reported TATE and CT1 ratio, 3Q10

Reported CT1 ratio (3Q10), current risk weighting

... which allow for a wide disparity in leverage

Reported TETA ratio (3Q10), current risk weighting

CT1 ratios based on a wide spread of risk‐weights...

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

0% 20% 40% 60% 80% 100%

Core Tier 1

Risk weighting

CS

UBS

DBKBARC

BAC

CJPM

MS

21-63% range

±1.1% range

0x

10x

20x

30x

40x

50x

0% 20% 40% 60% 80% 100%TA

TERisk weighting

CS

UBS

DBK

BARC

BACC

JPM

MS



Examining key reasons behind different risk weights

A wide difference exists in risk weights between IBs in Europe and the US. These institutions are frequently similar in their activity

mix (especially on the global investment banking side) and balance sheet size and are considered peers by the market; we believe

the key reasons for the differences in risk weights can be grouped into the following main categories:

1. Business mix: Genuine and substantial differences exist

We view differences in business mix and/or balance sheet composition as a genuine differentiator of risk at the individual bank level.

In our view, the mix of activities on the investment banking side is broadly similar, but more genuine differences materialize on the

lending/credit side, in our view.

For example, US banks run with higher proportions of unsecured lending, while the proportion of lower-risk mortgages tends to be

higher in Europe. Differences in risk weights are therefore to be expected and acknowledged here. Current disclosure does not allow

for a more detailed benchmarking of the credit portfolios; additionally our insight at the way the credit risk weights are set for

specific parts of the credit exposures is also limited. We believe most investors accept that credit books tend to be of different risk

profiles between regions – but the difference cannot be quantified with public disclosure, in our view.

A partial attempt at adjusting for the differences in business mix is to strip out the low-risk loans – residential mortgages –

completely from the average rw calculation. For CS/UBS, stripping out mortgages from total assets and RWA (by assuming a 10%

rw) results in average Basel III rw increasing to 34% for CS (from 32%, up 2 ppt) and to 39% for UBS (from 36%, so up 3 ppt). Low rw

of residential mortgages – a frequently quoted reason for the lower rw – cannot therefore explain the substantial difference, in our

view.

2. Accounting differences between US GAAP and IFRS

All of the exhibits use adjusted IFRS assets, as a proxy for US GAAP assets, as we discuss below.

US banks and CS file their accounts under US GAAP, while DBK, UBS and BARC do so under IFRS. Total assets (the denominator in

our RWA/A ratio) are higher under IFRS as netting of certain balances is not allowed. The largest area of difference is the treatment

of derivatives (replacement values), for which US GAAP uses net and IFRS gross balances. We adjust for this by calculating US

GAAP proxy assets for these banks as IFRS total assets less derivative balances (positive replacement values). As laid-out in

Appendix I, total asset figures for IFRS banks are presented on this basis in all Exhibits.

Our adjustment here is far from perfect and the analysis should be taken in this context. Still, we believe that the largest

differentiatior between total assets under US GAAP and IFRS is largely captured.

3. Off-balance sheet assets

US IBs hold comparatively more off-balance sheet assets than European IBs; these assets generate RWA that can distort the RWA/A

ratio by inflating the numerator. We have attempted to adjust for this element, but we caution that the disclosure of these items is

incomplete and comparability limited. We therefore see the use of these figures as a broad guide, rather than an exact estimate.



We adjust RWA/A ratio by adding off-balance sheet assets to the denominator of RWA/A ratio to arrive at an “on and off-balance

sheet asset risk weighting”. For the US banks, we calculate the average at 47%, compared to Europe at 34%. The differential would

narrow from the initial 79% to 36%.

Exhibit 7: Risk weighting differential remains, even if the definition is expanded to account for off balance sheet assets

RWA/A ratio including and excluding off balance sheet assets, Basel III, 3Q2010

Note 1: Off-balance sheet assets mainly consist of unused commitments. Note 2: BARC figures as of end 1H2010, due to semi-annual reporting.

Source: Goldman Sachs Research estimates.

4. Regulatory approach to RWA calculation, especially for mRWA

Currently, market RWA represent between 8%-16% of total RWA for European banks, compared to some 6%-37% for the US banks.

They are secondary in size to other types of RWA. While mRWA increases under Basel III, the approach used to calculate the

amounts will remain important in determining capital allocation, in our view.

Methodological differences in current mRWA calculations screen as a potentially important driver of the differences in risk weights.

Here, we refer to the application of various regulatory approved models, which can calculate a wide range of mRWA outcomes even

when the underlying risk is similar.

There are two main ways to calculate mRWA – standardized and advanced models. The standardized model generally results in

higher capital allocation and therefore a more punitive capital treatment. This is mainly due to the limited hedging benefit, which,

Risk weights

Simple On + Off balance sheet

RWA / Assets RWA / Assets + off balance sheet assets

CS 32% 26%

UBS 36% 33%

DBK (incl DPB) 39% 35%

BARC 47% 39%

Average Europe 39% 34%

BAC 79% 48%

C 74% 48%

JPM 65% 45%

MS 55% 47%

Average US 71% 47%

US / Europe 79% 36%

US - Europe 31ppt 13ppt



under the standardized approach is determined using formulae-based (or, “haircut-based”) rules. In contrast, an advanced model

will simulate the impact across the entire portfolio, giving a fuller benefit of hedging/diversification. The difference in capital

consumption under the standard and advanced approaches tends to be particularly notable with derivatives businesses.

Ultimately, we believe the question is the amount of capital backing a unit of risk – one way to approximate this is through a

mRWA/VaR ratio (Exhibit 9). We approximate the average mRWA/VAR for the US banks of 627, compared to Europe at 376. We note,

however, that averages for both the US and Europe are diverse, with outliers for both (for example, C in the US and BARC in

Europe).

In our analysis, we use market RWA as reported in the quarterly financial statements for European IBs and as per Y9-C disclosure for

the US IBs. For the purpose of this exercise we assume they are broadly comparable.

Our analysis runs as follows:

Determining the extent of advanced model usage for the calculation of mRWA: Usage of advanced models can give

rise to a lower mRWA calculation, for a similar portfolio of assets. We show that the US banks make substantially higher usage

of the standard model, while the European banks calculate substantially all of their mRWA through advanced models. This can

give rise to different levels of mRWA calculation, in our view.

We make the following steps:

Standardised VaR (1): We translate reported avg VaR into one-day, 99% VaR for all banks; we call this “standardized VaR”

VaR-related mRWA (2): We estimate mRWA driven by the standardized VaR; we call this “VaR-related mRWA”

Extent of advanced model usage for mRWA (3): We put VaR-related mRWA in the context of total mRWA; we believe this

is a good indication of the extent of advanced model use in calculating mRWA

Reported usage of advanced models (4): The source here is Pillar 3 disclosure, which is only provided by the European IBs

and shows that essentially all market RWA for CS, UBS and DBK are calculated using advanced models. BARC is the

exception with 34% of its mRWA derived through advanced models. The reported usage of the advanced model is higher

than what our “back test” would suggest for three reasons: we assume a scaling factor of 3x, at the lower end of the 3-4x

range, add-ons are not captured in our calculation, as they are not VaR driven, and VaR used to calculate mRWA might differ

from reported quarter average VaR.



Exhibit 8: Extensive advanced model usage in mRWA calculation for the European investment banks, compared to US peers VaR-related mRWA, 2Q2010 (3Q2010 for CS, UBS and DBK)


Comparing capitalization of mRWA between the US and European banks:

Our analysis continues along the following steps:

mRWA/VaR ratio (5) represents mRWA per unit of risk; the average in Europe is 376, compared to 627 in the US (Exhibit 9).

CT1 allocated per unit of risk (6) – we simply take the mRWA/VaR ratio and multiply it by the current CT1 ratio, to derive

the amount of CT1 capital backing each unit of risk. We show the result of this exercise in Exhibit 9.

VaR related mRWA VaR related mRWA

VaR (1-day, 99%) ccy % mRWA % of mRWA via

advanced approach

(1) (2) (3) (4)

CS 118 13,993 71% 95%

UBS 83 9,893 47% 100%

DBK (ex DPB) 87 10,281 49% 100%

BARC 81 9,558 15% 34%

Europe avg 331 39,220 32% -

BAC 189 22,413 15% -

C 188 22,294 35% -

JPM 127 15,091 14% -

MS 197 23,307 20% -

US avg 701 83,105 19% -

0%

20%

40%

60%

80%

100%

JPM BARC BAC MS C UBS DBK (ex DPB)

CS

VaR related mRWA (% of total) mRWA via advanced approach (% of total)



Exhibit 9: US banks seemingly back market assets with a higher amount of capital per unit of risk mRWA and CT1 per unit of risk as measured with 99%, one-day VaR


Conclusion

In our view, the actual contribution of each category to the difference in rw is impossible to quantify from the outside, due to limited

disclosure. However, we believe that with risk weightings failing to adequately capture actual levels of risk during the recent crisis,

market focus and debate on this topic are likely to increase.

Mechanically applying US risk weights to European assets reduces CT1

We mechanically apply US risk weights to European bank assets (Exhibit 10) to derive a theoretical CT1 ratio. We do not claim that

investors should look at capitalization of European banks on this basis. Rather, we use this as a way to mechanically translate and

observe differences in non-risk based leverage to the CT1 ratio (i.e. risk based) level. As discussed, there are a multitude of reasons

why rw in Europe and the US are different.

We show the outcome of this theoretical exercise below, as follows:

“Simple” risk weighting: mechanically applying the lowest and average US risk weight to European IBs’ assets

“On- and off-balance sheet” risk weighting: mechanically applying the average US total risk weight (where the denominator

includes both total assets and off-balance sheet assets) to European IBs’ assets.

mRWA / VaR CT1 / VaR

(5) (6)

CS 167 17

UBS 253 36

DBK (ex DPB) 243 21

BARC 776 78

Europe avg 376 39

BAC 769 65

C 338 35

JPM 874 83

MS 605 65

US avg 627 60

0

100

200

300

400

500

600

700

800

900

1,000

CS DBK (ex DPB) UBS C MS BAC BARC JPM



Exhibit 10: European ratios notably reduced if US risk weights are mechanically applied

CT1 ratios for European banks applying various US risk weights

Note: Calculations based on: (1) 2012E CT1 capital, which does not incorporate Basel III deductions/adjustments as the gradual phase in

starts in 2014, so after the end of our forecast period; (2) 2012E RWA estimates, which include our estimates of the Basel 2.5 and Basel III

impact.


CT1 ratio assuming various risk weights

Simple On + Off balance sheet

US Low (55%) US Avg (71%) US Avg (47%)

CS 10.8% 6.3% 4.9% 6.1%

UBS 14.0% 9.2% 7.2% 10.1%

DBK (proforma DPB) 8.4% 5.9% 4.6% 6.4%

BARC 10.0% 8.8% 6.9% 8.3%

Average 10.2% 7.4% 5.8% 7.5%

CT1 (2012E)



Swiss banks’ returns to de-rate, in absolute and relative terms, in our view

We expect the Swiss banks to face severe pressures on their returns as the amount of capital per unit of assets rises sharply,

in line with the spirit of new regulation. We believe CoCos are crucial in Swiss banks’ attempts to mitigate some of the

return compression. This said, even if we assume full CoCo issuance (for both the mandatory buffer as well as the SIFI

surcharge) we find that returns could decline by 7%-14% (so ROTE in the 16%-17% range) compared to “normalized” 2012E

levels, all else equal. The magnitude of a de-rating increases to 16%-24% (so ROTE in the 14%-15% range) if we assume the

3% mandatory buffer is met through tangible equity build-up. In either case, we struggle to see Swiss banks exceeding a

mid-teen ROTE under the new regulatory regime. Historically, the ROTE of Swiss IBs exceeded 30%, in good years.

In contrast to the Swiss banks is Deutsche Bank, which has a similar starting point of leverage, but without the same

potential de-leveraging pressures. As a consequence, we see a compression in the historically high ROTE differential

between the Swiss banks on one side and DBK on the other – the Swiss banks’ ROTE was 1.9x higher than that of DBK in

the 2004-06 period, while we see it declining towards 1.4x in 2012. Assuming full implementation of the new Swiss capital

regime this differential could fall further, towards 1.1x-1.2x.

Steady-state capitalization scenarios:

For these calculations we apply fully phased Basel III impact, for both the CT1 capital as well as RWA. We do this in order to reflect

the new steady-state profitability as well as capital structure. For the capital structure we assume full compliance with the new Swiss

regulation. This said, it is important to acknowledge the lengthy phase-in (or transition) period; for example, most of the hybrid

instruments will be grandfathered and therefore will count towards CT1 for a lengthy period of time.This will give banks additional

time to adjust their business mix and hence profitability.

For the Swiss banks, our analysis proceeds as follows:

New regulations call for capitalization of 19%. We expect the actual figure to end up around 20%, thus allowing for a

marginal voluntary buffer. This increase in capitalization can be achieved either by building up tangible equity – or – through a

combination of tangible equity build up and CoCo issuance.

The three basic scenarios to achieving the new minimum capitalization therefore are:

“11% + 9%”: holding common equity of 11%, but issuing high-trigger CoCos for the mandatory buffer of 3% as well as low

trigger CoCos for the SIFI surcharge of 6%.

“14% + 6%”: holding common equity of 14%, but issuing CoCos for the SIFI surcharge of 6%; for both CS and UBS, we see

this level of capitalization as the most likely outcome, and refer to it as “target” capitalization.

“20%”: build-up of tangible equity to 20%, without any CoCo issuance, only a theoretical scenario, in our view.



For Deutsche Bank, we introduce two scenarios:

“8% + 3%”: holding common equity of 8% (a buffer of 100 bp over the Basel III minimum), but issuing a type of hybrid

(possibly CoCos) for an additional 3% buffer. We note that DBK currently only has to comply with the Basel III standards, as

the German regulator has not issued any additional demands to date. For DBK, we see this level of capitalization as the most

likely outcome, and refer to it as “target” capitalization.

“11%”: build-up of tangible equity to 11%, without any hybrid/CoCo issuance.

Swiss returns to come under pressure, absolute and relative to DBK, as per our analysis:

Our analysis suggests that CS and UBS’ returns will continue to de-rate, while DBK’s returns will remain broadly stable.

The reasons for the de-rating of Swiss IBs’ returns are:

To meet new regulatory standards, both banks will need to hold more capital – this applies to tangible equity and other

components of regulatory capital. An increase in tangible equity reduces returns through an increase in base; an increase in

other forms of capital (mostly in the form of CoCos) through a reduction in profits.

Swiss IB returns de-rate least if CS/UBS make full use of CoCos (Scenario: “11% + 9%”). Assuming that both the mandatory

3% buffer and SIFI surcharge of 6% are met through CoCo issuance, we estimate steady-state ROTEs of 17.4% for CS and 15.9%

for UBS. This represents a de-rating of 14% for CS compared to our 2012N but only 7% for UBS. UBS ROTE compression is

smaller as we forecast the bank will reach a higher tangible equity level relative to CS by 2012E; in other words, the

capitalization starting point for the two banks is different.

Swiss ROTE de-rates further, if we assume the 3% mandatory buffer composed of tangible equity (Scenario: “14% + 6%”),

rather than CoCo issuance. The steady-state ROTE would fall to 15.3% for CS (a de-rating of 24% vs 2012E) and to 14.3% for UBS

(a de-rating of 16% vs 2012N).

Finally, assuming that both the 3% mandatory buffer as well as the SIFI charge are met through common equity implies a much

larger de-rating magnitude. We do not see this as realistic.

For DBK, returns are broadly stable if we assume the “8% + 3%” scenario, while they de-rate 15% if we assume build-up of core

capital towards the 11% mark.

We lay out the calculations in detail in Appendix II.



Exhibit 11: Swiss banks will see significant ROTE compression following B3…ROTE, %. We view “14% + 6%” the most likely capitalization outcome and refer to

it as “target” capitalization.

Exhibit 12: …DBK much less so

ROTE, %. We view “8% + 3%” as the most likely capitalization outcome and refer

to it as “target” capitalization

* Normalized TE * Normalized TE



20%

17%

15%

13%

17%16%

14%12%

0%

5%

10%

15%

20%

25%

GS(2012E)* 11% + 9% 14% + 6% 20%

CS UBS

14% 14%12%

0%

5%

10%

15%

20%

25%

GS(2012E)* 8% + 3% 11%

DBK



Exhibit 13: Increased capital requirements likely to reduce ROTE differential

between CS/UBS and DBK] ROTE

Exhibit 14: Swiss regulation will drive down leverage and relative returns,

versus European peer group. Reported TETA ratio (3Q10) and, BIII risk weighting; target capitalization

“14%+6%” for CS/UBS and “8%+3%” for DBK.

[2] “14%+6%” scenario for CS and UBS and “8%+3% for DBK; [3] “20%” scenario for CS

and UBS and “11% for DBK



0%

10%

20%

30%

40%

2004-06 avg 2012 (normalised) [2] [3]

CS UBS DBK

0x

10x

20x

30x

40x

50x

0% 20% 40% 60% 80% 100%

TATE

Risk weighting

CS

UBS

DBK

BARC

BACC

JPM

MSCStarget

UBStarget

DBKtarget

15

x-2

3x

ra

ng

e

32-79% range



Estimates changes and valuation

Exhibit 15: Estimate and price target changes, methodology and risks


Exhibit 16: Credit Suisse trades at 12% premium to UBS

P/TB multiples

Source: Company data, Datastream, Goldman Sachs Research estimates.

Old New ChangeGS EPS GS EPS GS EPS

2010E 2011E 2012E 2010E 2011E 2012E 2010E 2011E 2012EDBK € 5.56 5.54 5.79 49.00 12 months Neutral 5.43 5.52 5.77 51.00 12 months Neutral -2% 0% 0% 4%

CS SFr 4.29 5.72 6.15 57.00 12 months Buy 4.30 5.51 6.15 49.00 12 months Neutral 0% -4% 0% -14%

UBS SFr 1.80 1.85 2.15 20.90 12 months Neutral 1.79 1.80 2.13 20.10 12 months Neutral -1% -2% -1% -4%

Risks

DBK Better / worse than expected capital markets performance, German macroeconomic data, impact of regulatory changes (Basel 2.5 and Basel 3)

CS Better / worse than expected capital markets performance, NNM flows, impact of regulatory changes (Basel 2.5 and Basel 3)

UBS Better / worse than expected capital markets performance, NNM flows, impact of regulatory changes (Basel 2.5 and Basel 3)

TP changes

DBK Increased due to forecasting period roll forward

CS Target P/TB multiple reduced due to expected reduction in long-term sustainable ROTE (see "Swiss bank returns to de-rate" section of the report)

UBS Target P/TB multiple reduced due to expected reduction in long-term sustainable ROTE (see "Swiss bank returns to de-rate" section of the report)

Target Price

ROTE / COE

ROTE / COE

ROTE / COE

TP methodology

Target Price TP period Rating Target

Price TP period Rating

1.00

1.25

1.50

1.75

2.00

2.25

2.50

2.75

Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10

CS UBS

-50%

-25%

0%

25%

50%

Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10

CS / UBS



Credit Suisse (CSGN.VX): Absolute upside attractive, relative in line; down to Neutral

What happened

We have examined the Swiss regulatory proposal and in particular its impact on the long-term return prospects

of Swiss banks. As a consequence, we have revised our valuation model, and our new 12-month price target of

SFr49 implies upside of – a still healthy - 28%. In a European banks context, CS’s upside of 28% now compares

to 30% for the sector average; on this basis, we downgrade Credit Suisse to Neutral from Buy.

Since being added to the Buy List on October 3, 2008, Credit Suisse is down 33.5% versus the 35.3% average

decline of the European banks in our coverage and the 13.0% increase of the FTSE World Europe (-12.7% in SFr).

Over the last 12-months, Credit Suisse is down 27.5% versus the 18.6% average decline of the European banks

and the FTSE World Europe’s 2.7% rise (-4.8% in SFr).

Current view

We believe that the new regulatory set-up is likely to put severe pressure on Swiss banks’ returns, when fully

phased. This is a consequence of a sharp increase in capital per unit of assets, which we estimate will push CS’s

current leverage lower.

To achieve our target capitalization structure – which we see as a combination of 14% CT1 and a 6% low trigger

CoCo issuance – we believe Credit Suisse would need to accelerate its equity build up. In our view, this is likely

to include a downward adjustment in the cash component of the dividend (we have reduced 2010E-2011E DPS

from SFr2.0 to SFr1.0). As equity builds up, steady-state returns are likely to compress substantially when

compared to those from the pre-crisis periods. We show that for both CS and UBS, steady state returns on

proposed Swiss capital regulation are unlikely to exceed mid-teens, on our estimates.

We have incorporated our lowered expectations of steady-state returns into our valuation and have reduced the

target P/TB multiple as a consequence. This drives down our 12 month ROTE/COE-model price target, from

SFr57 previously to SFr49 currently, leaving it with potential upside of 28%, compared to the European banks’

sector average of 30%. While the potential upside remains healthy in absolute terms, we believe the relative

upside now warrants a Neutral rating.

Source: Company data, Goldman Sachs Research estimates, FactSet.

Key data Current

Price (SFr) 38.19

12 month price target (SFr) 49.00

Upside/(downside) (%) 28

Market cap (SFr mn) 44,743.4

Tier 1 ratio (%) 16.3

12/09 12/10E 12/11E 12/12E

GS EPS (SFr) New 5.96 4.30 5.51 6.15

EPS (SFr) Old 5.96 4.29 5.72 6.15

DPS (SFr) New 2.00 1.00 1.00 1.00

DPS (SFr) Old 2.00 2.00 2.00 2.00

GS P/E (X) 6.4 8.9 6.9 6.2

Dividend yield (%) 5.2 2.6 2.6 2.6

GS ROE (%) 21.9 14.9 18.2 17.6

P/BV (X) 1.6 1.3 1.1 1.0

310

330

350

370

390

410

35

40

45

50

55

60

Dec-09 Mar-10 Jun-10 Sep-10

Price performance chart

Credit Suisse (L) FTSE World Europe (GBP) (R)

Share price performance (%) 3 month 6 month 12 month

Absolute (15.8) (11.7) (27.5)

Rel. to FTSE World Europe (GBP) (21.3) (23.6) (29.4)

Source: Company data, Goldman Sachs Research estimates, FactSet. Price as of 12/07/2010 close.



Exhibit 17: Performance of Credit Suisse versus peer group Priced as of the close on December 7, 2010

Note: Prices as of most recent available close, which could vary from the price date indicated above

This table shows movement in absolute share price and not total shareholder return. Results presented should not and cannot be viewed as an indicator of future

performance.

Source: Factset, Quantum database.

Company Ticker Primary analyst Price currency

Price as of Dec 7, 2010

Price performance since Oct 3, 2008

3 month price performance



Europe Banks Peer Group Credit Suisse CSGN.VX Jernej Omahen SFr 38.19 -33.5% -15.8% -11.7% -27.5%Agricultural Bank of Greece AGBr.AT Heiner Luz € 0.79 -62.4% -26.2% -18.6% -57.5%Allied Irish Banks ALBK.I Pawel Dziedzic € 0.45 -94.0% -41.1% -53.3% -70.5%Alpha Bank ACBr.AT Heiner Luz € 4.70 -66.0% -13.4% 9.0% -46.0%Banca Monte dei Paschi di Siena BMPS.MI Domenico Vinci € 0.86 -52.2% -11.8% 3.5% -33.7%Banca Popolare di Milano PMII.MI Domenico Vinci € 2.65 -54.9% -23.9% -17.9% -49.9%Banco Pastor PAS.MC Pawel Dziedzic € 3.85 -38.6% -2.4% 2.3% -20.7%Banco Popolare BAPO.MI Domenico Vinci € 3.28 -68.3% -28.6% -20.7% -42.2%Banco Popular Espanol POP.MC Pawel Dziedzic € 4.16 -51.5% -13.5% 8.6% -27.1%Banco Sabadell SABE.MC Jernej Omahen € 3.18 -42.7% -18.0% -0.1% -23.5%Banesto BTO.MC Pawel Dziedzic € 6.37 -37.5% -10.3% 7.0% -27.0%Bank of Cyprus BOCr.AT Heiner Luz € 2.98 -27.9% -12.9% 28.5% -18.5%Bank of Ireland BKIR.I Pawel Dziedzic € 0.42 -86.5% -42.1% -45.1% -59.4%Bank of Piraeus BOPr.AT Heiner Luz € 3.23 -77.0% -23.6% -14.1% -67.0%Bankinter BKT.MC Pawel Dziedzic € 4.20 -50.8% -20.6% -1.6% -40.7%Barclays plc BARC.L Aaron Ibbotson, CFA p 262.60 -28.6% -16.4% -8.1% -11.6%BBVA BBVA.MC Jernej Omahen € 7.76 -34.3% -17.3% 7.1% -37.9%BNP Paribas BNPP.PA Jean-Francois Neuez € 49.28 -28.9% -6.5% 15.4% -11.1%Commerzbank AG CBKG.DE Domenico Vinci € 5.75 -59.5% -9.4% 4.9% -7.3%Credit Agricole SA CAGR.PA Jean-Francois Neuez € 10.04 -34.8% -5.6% 22.3% -26.4%Credito Emiliano EMBI.MI Domenico Vinci € 4.48 -28.5% -6.2% 3.9% -16.2%Credito Valtellinese PCVI.MI Domenico Vinci € 3.15 -47.0% -13.9% -16.7% -43.5%Danske Bank DANSKE.CO Aaron Ibbotson, CFA Dkr 147.90 11.2% 8.6% 16.5% 27.5%Deutsche Bank DBKGn.DE Jernej Omahen € 38.19 -21.0% -15.1% -9.8% -15.1%Deutsche Postbank DPBGn.DE Jernej Omahen € 20.16 -38.0% -18.4% -15.1% -18.5%Dexia DEXI.BR Jean-Francois Neuez € 2.94 -64.0% -9.4% -2.3% -38.5%DnB NOR DNBNOR.OL Aaron Ibbotson, CFA Nkr 78.45 69.5% 5.6% 22.6% 20.7%EFG Eurobank EFGr.AT Heiner Luz € 4.40 -64.5% -17.8% 21.2% -50.0%EFG International EFGN.S Jean-Francois Neuez SFr 12.50 -62.1% 11.6% -16.9% -21.1%Erste Bank ERST.VI Frederik Thomasen € 32.69 -15.1% 12.1% 30.2% 13.2%Grupo Santander SAN.MC Jernej Omahen € 8.10 -25.7% -16.0% 8.5% -32.0%Hellenic Bank HBNK.CY Heiner Luz € 0.90 -50.8% -12.6% -6.3% -23.7%HSBC HSBA.L Frederik Thomasen p 665.50 -17.7% 0.5% 5.7% -6.6%Intesa Sanpaolo ISP.MI Domenico Vinci € 2.11 -45.8% -10.3% 6.4% -30.6%Julius Baer Group BAER.VX Jean-Francois Neuez SFr 43.10 NA 13.4% 32.4% 29.9%KBC KBC.BR Frederik Thomasen € 28.80 -54.5% -14.1% -1.6% -10.9%Lloyds Banking Group Plc LLOY.L Aaron Ibbotson, CFA p 66.70 -53.7% -8.0% 23.6% 24.2%Marfin Popular Bank CPBC.CY Heiner Luz € 1.19 -61.2% -16.4% -0.7% -42.4%National Bank of Greece NBGr.AT Heiner Luz € 7.01 -69.2% -20.7% -10.8% -59.2%Natixis CNAT.PA Jean-Francois Neuez € 3.68 37.2% -19.4% 5.9% 3.3%Nordea NDA.ST Aaron Ibbotson, CFA Skr 71.65 4.3% 5.6% 12.8% -4.1%Raiffeisen Bank International RBIV.VI Frederik Thomasen € 39.62 -25.0% 18.0% 29.7% -10.0%Royal Bank of Scotland RBS.L Aaron Ibbotson, CFA p 41.06 -77.9% -11.0% -4.7% 24.4%Sarasin BSAN.S Jean-Francois Neuez SFr 39.45 -1.4% 4.4% -5.4% 5.2%SEB SEBa.ST Aaron Ibbotson, CFA Skr 53.35 -14.4% 11.4% 36.0% 8.2%Societe Generale SOGN.PA Jean-Francois Neuez € 38.90 -40.2% -8.7% 25.5% -20.3%Standard Chartered STAN.L Frederik Thomasen p 1842.00 56.2% 3.1% 18.7% 28.1%Svenska Handelsbanken SHBa.ST Aaron Ibbotson, CFA Skr 214.00 30.5% 4.1% 14.7% 1.3%Swedbank SWEDa.ST Aaron Ibbotson, CFA Skr 94.75 10.7% 10.7% 41.8% 25.1%TT Hellenic Postbank S.A. GPSr.AT Heiner Luz € 3.19 -48.2% -31.1% 27.6% -29.3%UBI Banca UBI.MI Domenico Vinci € 6.79 -55.7% -5.3% 1.3% -31.7%UBS UBSN.VX Jernej Omahen SFr 15.52 -35.3% -12.9% 5.4% -4.1%UniCredit CRDI.MI Domenico Vinci € 1.66 -33.5% -13.7% 5.8% -26.4%Vontobel VONN.S Jean-Francois Neuez SFr 33.40 -6.3% 11.1% 13.8% 14.2%

FTSE World Europe (GBP) 375.88 13.0% 7.0% 15.6% 2.7%Index performance in stock price currency 5.8 -12.7% 7.4% 6.7% -4.8%



Appendix I: Peer group, methodology and trying to bridge the gap in US GAAP and IFRS

Global investment banking peer group

Throughout this report we use the term European investment banks (“European IBs”) to describe a group of the following banks:

Credit Suisse (CS), UBS, Deutsche Bank (DBK) and Barclays (BARC). Similarly, we use US investment banks (“US IBs”) to describe

the following group: Bank of America (BAC), Citigroup (C), JPMorgan (JPM) and Morgan Stanley (MS). In our view, the market views

these two groups of banks as “peers”.

Total assets – using US GAAP where available and US GAAP proxy where not

Importantly, we note that the accounting standards used by IBs are not uniform. US banks and CS file their accounts under US

GAAP, while DBK, UBS and BARC do so under IFRS. Total assets are higher under IFRS as netting of certain balances is not allowed.

By far the largest area of difference is the treatment of derivatives (replacement values), where US GAAP uses net and IFRS gross

balances.

There are a number of ways to adjust the total assets difference under US GAAP and IFRS, and all are approximate. In this note, we

adjust by calculating US GAAP proxy assets for banks that file accounts under IFRS as total IFRS assets less total derivative balances

(positive replacement values). Total asset figures for IFRS banks are presented on this basis in all Exhibits and in all of our

calculations.

DBK discloses their own “target definition” leverage ratio, which is based on US GAAP proxy assets and equity. Here, DBK adjusts

its IFRS total assets (€1,958 bn) for €914 bn, which consists of netting of derivatives (€760 bn, 83% of the total adjustment),

additional pending settlements (€144 bn, 16%) and additional reverse repo netting (€10 bn, 1%). We are not able to replicate the

additional pending settlements and reverse repo netting for the three IFRS reporting banks in Europe, so rather than follow DBK’s

approach we deduct the gross derivatives balance for all; in the case of DBK our adjusted assets are within 10% of that of DBK.

UBS discloses “FINMA assets”, which are used to calculate FINMA leverage ratios. These are calculated as follows: total assets -

derivatives (nettable under Swiss GAAP) - loans to Swiss clients (ex interbank) - cash – other, with all balances quarter average.

Total assets adjusted in this manner are SFr792 bn. However, adding back loans to Swiss clients and cash, total assets would rise to

SFr991 bn. Under our approach (IFRS assets less derivatives) we get to SFr923 bn.

Tangible equity

We calculate tangible equity as per US GAAP and IFRS reporting of stated equity respectively, adjusted for total intangible assets.



Exhibit 18: Our path of adjustments to broadly comparable assets and leverage ratios Leverage ratio calculation, 3Q2010


Appendix II: Swiss bank returns to de-rate, in absolute and relative terms, in our view

Our analysis of the steady-state returns, under new regulatory regime is laid out in Exhibit 19. The analysis follows the following key

steps:

1. TE normalization. Normalized 2012 tangible equity is assumed to be equal to 2012E Equity Tier 1 estimate. This adjustment

eliminates such temporary distortions to TE as gains on own debt and cash flow hedges.

2. Progression toward target capital structure. We than assume that banks will pay no dividends and do not grow RWA until

target capital structure is reached, through compounding of normalized profits. When targeted equity Tier 1 is reached, we assume

banks move to retire existing hybrids via repurchase at par. Furthermore, we assume that CoCos are issued to achieve targeted Tier

1 ratio (total capital ratio of 20%).

3. Target capital structure. We consider the following three target capital structure scenario for CS and UBS – these are in line with

the current Swiss regulatory proposal (for more on this topic see our note: October 12, 2010: Swiss endorse CoCos – laying out

scenarios for European TBTF capital surcharge).

[1] 11% equity Tier 1 + 3% CoCo (high trigger) + 6% CoCo (low trigger)

[2] 14% equity Tier 1 + 6% CoCo (low trigger)

[3] 20% equity Tier 1

Total Assets Tangible Assets Tangible equity Leverage ratios

Reporting GAAP

Reporting CCY IFRS Adjustment US GAAP (or

proxy) Intagibles US GAAP (or proxy) CCY IFRS US GAAP (or

proxy)Europe

CS US SFr ‐ ‐ 1,067 9 1,058 25 ‐ 43x

UBS IFRS SFr 1,461 517 943 10 933 37 39x 25x

DBK (incl DPB) IFRS € 2,189 820 1,369 14 1,356 35 63x 39x

BARC IFRS £ 1,587 505 1,082 9 1,073 41 39x 26x

US

BAC US US$ ‐ ‐ 2,340 83 2,257 130 ‐ 17x

C US US$ ‐ ‐ 1,983 31 1,953 132 ‐ 15x

JPM US US$ ‐ ‐ 2,142 52 2,090 114 ‐ 18x

MS US US$ ‐ ‐ 841 12 830 36 ‐ 23x



For DBK, we assume the following two scenarios, which are based around the current Basel III proposal:

[1] 8% equity Tier 1 + 3% CoCo (low trigger)

[2] 11% equity Tier 1

4. Steady-state net income. We estimate steady-state net income by taking GS 2012 net income estimates, adding cost of hybrids

(that will be repurchased), subtracting cost of high and low trigger CoCo and adding yield on additional equity accumulated (at a

rate for a senior bond).

We assume the following rates for key instruments:

CoCo (high trigger): 7.50% after tax, 10% before tax;

CoCo (low trigger): 6.75% after tax, 9% before tax;

Tier 1 hybrids: 5.25% after tax, 7% before tax;

Senior unsecured debt: 2.25% after tax, 3% before tax.

5. Steady-state ROTE. We divide steady-state net income by TE achieved at the time when target capital structure is reached.

Using UBS as an example, the analysis would work as follows (again, Exhibit 19 lays this out for all three banks under review), if

we assume a capitalization scenario of “14% equity Tier 1 + 6% CoCo”, which is our target scenario:

1. TE normalization. We forecast UBS tangible equity at SFR53.5 bn in 2012E. We normalize TE by adjusting for own share

deduction (SFr2.3 bn), cash flow hedges impact (SFr2.2 bn), gain on own debt (SFr0.8 bn) and other temporary effects (SFr0.1bn) to

arrive to normalized TE of SFr48.1 bn.

2-3. Target capital structure. We assume that UBS pays no dividend until target equity Tier 1 ratio of 14% is reached in 2013. Than,

we assume, that UBS redeems SFr5.2 bn of hybrids and issues SFr20.6 bn of CoCo (low trigger) to bring total Tier 1 ratio inline with

the 20% capital target.

4. Steady-state net income = SFr7.8 bn = 2012 net income of SFr8.2 bn + saved expense on repurchased hybrids of SFr0.3 bn –

total cost of CoCo of SFr1.4 bn + yield on equity build up of SFr0.7 bn.

5. Steady-state ROTE of 14.3% is derived from steady state net income of SFr7.8 bn and steady-state TE of SFr54.3bn



Exhibit 19: New regulation pressures IBs’ returns, more so for the Swiss IBs than for DBK, on our analysis

Normalized ROTE assuming different capital structures, %


CS UBS DBK

[1] [2] [3] [1] [2] [3] [1] [2]

GS(2012E)* 11% + 9% 14% + 6% 20% GS(2012E)* 11% + 9% 14% + 6% 20% GS(2012E)* 8% + 3% 11%

Normalised capital structure (year) 2012N 2014 2015 2018 2012N 2013 2014 2017 2012N 2013 2016

Capital structure (% of RWA)

Equity Tier 1 (B3) 10.8% 11.0% 14.0% 20.0% 12.0% 11.0% 14.0% 20.0% 8.1% 8.0% 11.0%

CoCo (H) 0.0% 3.0% 0.0% 0.0% 0.0% 3.0% 0.0% 0.0% 0.0% 0.0% 0.0%

CoCo (L) 0.0% 6.0% 6.0% 0.0% 0.0% 6.0% 6.0% 0.0% 0.0% 3.0% 0.0%

Hybrids 4.2% 0.0% 0.0% 0.0% 1.5% 0.0% 0.0% 0.0% 2.3% 0.0% 0.0%

Tier 1 (B3) 15.0% 20.0% 20.0% 20.0% 13.5% 20.0% 20.0% 20.0% 10.5% 11.0% 11.0%

Capital structure

RWA (B3) 343 343 343 343 343 343 343 343 532 532 532

Equity Tier 1 (B3) 37 38 48 69 41 38 48 69 43 43 59

CoCo (H) 0 10 0 0 0 10 0 0 0 0 0

CoCo (L) 0 21 21 0 0 21 21 0 0 16 0

Hybrids 14 0 0 0 5 0 0 0 12 0 0

Tier 1 (B3) 51 69 69 69 47 69 69 69 56 59 59

Net income

Net income + cost of hybrids 8.2 8.2 8.2 8.2 8.5 8.5 8.5 8.5 6.9 6.9 6.9

(-) Cost of CoCo (H) 0.0 -0.8 0.0 0.0 0.0 -0.8 0.0 0.0 0.0 0.0 0.0

(-) Cost of CoCo (L) 0.0 -1.4 -1.4 0.0 0.0 -1.4 -1.4 0.0 0.0 -1.1 0.0

(-) Cost of hybrids -0.8 0.0 0.0 0.0 -0.3 0.0 0.0 0.0 -0.7 0.0 0.0

(+) Interest on bonds repurchased 0.0 0.5 0.5 0.5 0.0 0.7 0.7 0.7 0.0 0.2 0.2

Net income (shareholders) 7.5 6.6 7.3 8.7 8.2 7.0 7.8 9.1 6.2 6.0 7.1

Ratio

ROTE (normalised) 20.2% 17.4% 15.3% 12.7% 17.1% 15.9% 14.3% 12.2% 13.9% 13.7% 11.8%

v 2012E - -14% -24% -37% - -7% -16% -28% - -2% -15%

TA / TE 29x 28x 22x 16x 20x 21x 17x 13x 31x 32x 23x

TA / (TE + CoCo) 16x 16x 16x 13x 13x 13x 23x 23x

* Normalised tangible equity = CT1 (Basel 3) + permanent deductions (DTA, pension assets, shortfall of a stock of provisions over expected loss)



Reg AC

We, Jernej Omahen and Richard Ramsden, hereby certify that all of the views expressed in this report accurately reflect our personal views about the subject company or companies and its or their

securities. We also certify that no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report.

Investment Profile

The Goldman Sachs Investment Profile provides investment context for a security by comparing key attributes of that security to its peer group and market. The four key attributes depicted are: growth,

returns, multiple and volatility. Growth, returns and multiple are indexed based on composites of several methodologies to determine the stocks percentile ranking within the region's coverage

universe.

The precise calculation of each metric may vary depending on the fiscal year, industry and region but the standard approach is as follows:

Growth is a composite of next year's estimate over current year's estimate, e.g. EPS, EBITDA, Revenue. Return is a year one prospective aggregate of various return on capital measures, e.g. CROCI,

ROACE, and ROE. Multiple is a composite of one-year forward valuation ratios, e.g. P/E, dividend yield, EV/FCF, EV/EBITDA, EV/DACF, Price/Book. Volatility is measured as trailing twelve-month

volatility adjusted for dividends.

Quantum

Quantum is Goldman Sachs' proprietary database providing access to detailed financial statement histories, forecasts and ratios. It can be used for in-depth analysis of a single company, or to make

comparisons between companies in different sectors and markets.

Disclosures

Coverage group(s) of stocks by primary analyst(s)

Jernej Omahen: Europe-Pan-Euro Banks. Richard Ramsden: America-Large Banks.

America-Large Banks: Bank of America Corporation, Citigroup Inc., J.P. Morgan Chase & Co., Morgan Stanley & Co., PNC Financial Services, U.S. Bancorp, Wells Fargo & Company.

Europe-Pan-Euro Banks: Agricultural Bank of Greece, Allied Irish Bank, Alpha Bank, Banca Monte dei Paschi di Siena, Banca Popolare di Milano, Banco Pastor, Banco Popolare, Banco Popular Espanol,

Banco Sabadell, Banesto, Bank of Cyprus, Bank of Ireland, Bank of Piraeus, Bankinter, Barclays plc, BBVA, BNP Paribas, Commerzbank AG, Credit Agricole SA, Credit Suisse, Credito Emiliano, Credito

Valtellinese, Danske Bank, Deutsche Bank, Deutsche Postbank, Dexia, DnB NOR, EFG Eurobank, EFG International, Erste Bank, Grupo Santander, Hellenic Bank, HSBC, Intesa Sanpaolo, Julius Baer

Group, KBC, Lloyds Banking Group Plc, Marfin Popular Bank, National Bank of Greece, Natixis, Nordea, Raiffeisen Bank International, Royal Bank of Scotland, Sarasin, SEB, Societe Generale, Standard

Chartered, Svenska Handelsbanken, Swedbank, TT Hellenic Postbank S.A., UBI Banca, UBS, UniCredit, Vontobel.

Company-specific regulatory disclosures

The following disclosures relate to relationships between The Goldman Sachs Group, Inc. (with its affiliates, "Goldman Sachs") and companies covered by the Global Investment Research Division of

Goldman Sachs and referred to in this research.

Goldman Sachs beneficially owned 5% or more of common equity (excluding positions managed by affiliates and business units not required to be aggregated under US securities law) as of the

second most recent month end: Credit Suisse (SFr38.85) and UBS (SFr15.77)

Goldman Sachs has received compensation for investment banking services in the past 12 months: BNP Paribas (€50.61), Credit Suisse (SFr38.85) and Deutsche Bank (€38.56)

Goldman Sachs expects to receive or intends to seek compensation for investment banking services in the next 3 months: BNP Paribas (€50.61), Credit Suisse (SFr38.85), Deutsche Bank (€38.56) and

UBS (SFr15.77)

Goldman Sachs has received compensation for non-investment banking services during the past 12 months: BNP Paribas (€50.61), Credit Suisse (SFr38.85), Deutsche Bank (€38.56) and UBS (SFr15.77)



Goldman Sachs had an investment banking services client relationship during the past 12 months with: BNP Paribas (€50.61), Credit Suisse (SFr38.85), Deutsche Bank (€38.56) and UBS (SFr15.77)

Goldman Sachs had a non-investment banking securities-related services client relationship during the past 12 months with: BNP Paribas (€50.61), Credit Suisse (SFr38.85), Deutsche Bank (€38.56) and

UBS (SFr15.77)

Goldman Sachs had a non-securities services client relationship during the past 12 months with: BNP Paribas (€50.61), Credit Suisse (SFr38.85), Deutsche Bank (€38.56) and UBS (SFr15.77)

Goldman Sachs has managed or co-managed a public or Rule 144A offering in the past 12 months: BNP Paribas (€50.61)

Goldman Sachs holds a position greater than U.S. $15 million (or equivalent) in the debt or debt instruments of: BNP Paribas (€50.61)

Distribution of ratings/investment banking relationships

Goldman Sachs Investment Research global coverage universe

Rating Distribution Investment Banking Relationships

Buy Hold Sell Buy Hold Sell

Global 30% 54% 16% 50% 43% 37%

As of October 1, 2010, Goldman Sachs Global Investment Research had investment ratings on 2,845 equity securities. Goldman Sachs assigns stocks as Buys and Sells on various regional Investment

Lists; stocks not so assigned are deemed Neutral. Such assignments equate to Buy, Hold and Sell for the purposes of the above disclosure required by NASD/NYSE rules. See 'Ratings, Coverage

groups and views and related definitions' below.



Price target and rating history chart(s)

Regulatory disclosures

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Credit Suis se (CSGN.VX)

61

62

68716867

6443

4560

597058

5360

57.2144.9

50.5

53

69.8968.52

82.386.3

2030405060708090

100

200

250

300

350

400

450Goldman Sachs rating and stock price target history

Stock Price Currency : Sw iss Franc

Source: Goldman Sachs Investment Research for ratings and price targets; FactSet closing prices as of 9/30/2010.

The price targets show n should be considered in the context of all prior published Goldman Sachs research, w hich may or may not have included price targets, as w ell as developments relating to the company, its industry and f inancial markets.

Rating

Price target

Price target at removal

Covered by Jernej Omahen,as of Apr 9, 2009

Not covered by current analyst

Oct 1, 2007 N

FTSE World Europe (GBP)

Inde

x Pr

ice

Stoc

k Pr

ice Nov 20 Apr 25 Oct 3

S NN

BD J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S

2007 2008 2009 2010

De utsche Bank (DBKGn.DE)

57.4959.31

56.5748.36

46.5447.45

48.3635.59

34.6753.84

60.22

62.96

60.2266.61

72.0974.82

75.7480.95

90.2492.53

0

20

40

60

80

100

100150200250300350400450500

Goldman Sachs rating and stock price target history

Stock Price Currency : Euro



Rating

Price target




FTSE World Europe (EUR)

Inde

x Pr

ice

Stoc

k Pr

ice

NN

D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S2007 2008 2009 2010

UBS (UBSN.VX)

22.8

19.4

19.619.5

1817.2

22.112.5

20

25

31

34

32.82

31.4535.57

37.3546.87

56.83

56.7266.0866.8869.99

01020304050607080

200

250

300

350

400

450Goldman Sachs rating and stock price target history

Stock Price Currency : Sw iss Franc



Rating

Price target




Oct 1, 2007 B

FTSE World Europe (GBP)

Inde

x Pr

ice

Stoc

k Pr

ice Dec 19

NN

D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S2007 2008 2009 2010



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still not a level playing field; regulatory differences ...methodological differences are also...

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